NC Court of Appeals Decision: 3 Strikes and You’re Out for Non-Judicial Foreclosures

On August 19, 2014, the North Carolina Court of Appeals released a decision that may significantly affect the non-judicial foreclosure process in the state. The ruling states that a creditor in North Carolina seeking to enforce payment of a promissory note by pursuing foreclosure by power of sale cannot voluntarily dismiss more than one non-judicial foreclosure before being barred from filing additional non-judicial foreclosures on the subject lien. However, the creditor would still have the option of filing a judicial foreclosure after taking voluntary dismissals on two prior non-judicial foreclosures.

The ruling was issued by the appeals court as an outcome of Lifestore Bank’s attempt to file a judicial foreclosure against Mingo Tribal Preservation Trust after voluntarily dismissing a set of two non-judicial foreclosures against Mingo.

On February 12, 2007, Mingo Tribal Preservation Trust (hereinafter “Mingo”) executed a promissory note to Lifestore Bank for $2,450,000.00, which was secured by a deed of trust on property owned by Tuscarora Ranch, LLC. On February 8, 2008, Mingo executed a new promissory note to Lifestore for $1,800,000.00, which was secured by a deed of trust on property owned by Pitchfork Basin, f/k/a EAC Rev No. 6, LLC (hereinafter “EAC”).

On December 1, 2010, Lifestore filed a non-judicial foreclosure against Mingo and Tuscarora on the Tuscarora Note. The Clerk of Court entered an order for sale and Mingo appealed to the Superior Court, which affirmed the Clerk’s order for sale. Mingo then appealed to the NC Court of Appeals. On October 10, 2011, Lifestore entered a voluntary dismissal without prejudice as to the non-judicial foreclosure.

On December 1, 2010, Lifestore filed a non-judicial foreclosure against Mingo and EAC on the EAC Note. The Clerk of Court entered an order for sale. This order was appealed to the Superior Court, which affirmed the Clerk of Court’s order for sale. Mingo and EAC appealed to the NC Court of Appeals on April 6, 2011. On October 7, 2011, Lifestore entered a voluntary dismissal without prejudice as to the non-judicial foreclosure.

On December 7, 2011, Lifestore filed the second non-judicial foreclosure actions in reference to the Tuscarora and EAC Notes. The Clerk of Court entered an order for sale in both actions and Mingo again appealed both orders to the Superior Court. Lifestore entered a voluntary dismissal without prejudice in each action on July 13, 2012.

On June 6, 2012, Lifestore filed a complaint against Mingo, Tuscarora, and EAC seeking judgments for both notes and asking for a judicial foreclosure sale. Mingo, Tuscarora, and EAC filed a motion to dismiss Lifestore’s complaint citing the two dismissal rule of NC Rules of Civil Procedure Rule 41 and sought collateral estoppel for the suit on the notes. The trial court entered an order denying summary judgment on the claims on the notes, but granted the motion to dismiss the judicial foreclosure.

The Court of Appeals then heard cross appeals from the parties following the trial court’s ruling and determined that Rule 41 does not bar a note holder from filing a judicial foreclosure after the filing of two voluntary dismissals on non-judicial foreclosures. However, it does bar the filing of a third non-judicial foreclosure.

There is uncertainty on how the courts will interpret this decision. Note holders should carefully review their close and bill instructions sent to their trustee firms to ensure voluntary dismissals are only filed upon prior approval of the note holder. It is possible that an argument of continuing default could be made, which would allow a new non-judicial foreclosure to be filed based on a new default, even in the case of two prior non-judicial foreclosures being voluntarily dismissed. In certain cases, it may be advisable to handle contested matters as judicial foreclosures in order to avoid the uncertainty that has been created by this decision.

If you have any questions regarding this court opinion, please contact our office at (704) 307-4350.